This article compares how the PPF has performed against the SENSEX since 1979 to help investors decide if they should invest a lump sum in PPF in April 2024.
This article compares how the PPF has performed against the SENSEX since 1979 to help investors decide if they should invest a lump sum in PPF in April 2023.
This article gives you the current and historical interest rates for PPF so that you can decide if investing in PPF is the right option for your portfolio.
A PPF account matures on 1st April after 15 years from the end of the financial year of opening. This rule works like this:
if you opened the account between 1st April and 31st December of Year 20XX, the account will mature on 1st April of 20(XX+16). E.g. an account opened on 1st December 2020 will mature on 1st April 2036
if you opened the account between 1st January and 31st January of Year 20XX, the account will mature on 1st April of 20(XX+15). E.g. an account opened on 1st January 2020 will mature on 1st April 2035
Note: Your PPF will mature on 1Apr22 only if you have opened the account between 1Apr08 and 31Mar09. You need to put an extension request between 1Apr22 and 31Mar23.
This post will show the precise steps to decide whether you should continue the PPF account or withdraw to invest in mutual funds or use the amount for other purposes.
Options of PPF extension
PPF accounts will mature in 15 years but need not be closed immediately. A matured account will keep earning interest if there is any balance. The following rules govern PPF extension:
Option 1 is to Withdraw: You can withdraw the entire amount and close the account. To invest further in PPF in the future, you need to create a new PPF account which restarts the 15-year clock. Therefore even if you need the money, you should not close the account immediately. If you do not want to withdraw, you can extend the account and unlimited extensions are allowed in blocks of 5 years.
Option 2 is to Extend PPF without fresh investments: if you did not put in an extension request on time, i.e. within a year of the maturity date, then this option gets activated automatically. Partial withdrawals, up to the full balance of the account, are allowed once a financial year (Apr to Mar) but you cannot invest any new money. Investors should explicitly provide an instruction to the bank or post office to avoid this situation
Option 3 is to Extend with fresh investments: if you wish, you can invest up to ₹1.5L/year after extension. 80C tax deduction is allowed on this investment. Up to 60% of the corpus can be withdrawn when you decide to extend for each five-year extension with fresh investments once every block of five years.
We need to keep in mind that a PPF account can be kept active with just ₹500/year of investment. Hence, the problem essentially simplifies to:
Step 1: Extend the PPF account for five years since this is the most flexible case. As situations change, you can invest more in the account and retain the tax exemption and guaranteed return benefits
Step 2: Decide whether to withdraw wholly or partially as per the need by following the steps below
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Step 1: Gather information
The question of PPF withdrawal only makes sense in the context of having a proper plan for retirement or other goals against which the PPF account has been tagged as an investment. If you have not done that yet, please follow the goal-setting process first: How do you get the SIP amount for a complete portfolio.
You need to have the following information with you:
a list of assets like stocks, mutual funds, bonds, Provident Fund, real estate, jewellery and other investments and their present valuation
how much of the assets are illiquid like real estate
the targets in place for significant goals as applicable like retirement corpus or children’s higher education or marriage
a list of the large expenses planned in the next 5 years like a child’s college education or house purchase
an emergency fund for 6-12 times mandatory (that includes any EMI) expenses
are any of the major expenses in the next five years dependent on the PPF maturity amount
are there any significant outstanding loans like a home loan/business loan
are you planning to take a big loan soon for purposes like children’s education
will you have a stable income source for the next five years
Using the information gathered in the previous step, you can use the goal-based investing template to figure out the current and target asset allocation for your goals. The basic premise here is that:
money needed for short-term goals should be in debt investments
money needed for medium to long-term goals should partially be in risky investments, like equity, with the amount of equity allocation proportional to the time horizon of the goal
The rest is straightforward once the asset allocation is known using the goal-based investing template. There are the following cases:
Money is needed in the next five years
If there are significant goals, like children’s college education due soon, say within the next five years, then some or most of the PPF amount should be diverted to short-duration debt funds as a lump sum.
Excess debt allocation and low equity
Many investors will be in this bucket if they have started with a high allocation to debt assets like PPF and EPF and started equity investing very late. An alternative way to reach this stage is a relatively large fall in the equity markets in the months leading to the PPF maturity.
In this case, you should fix the asset allocation by using a majority of the PPF maturity amount to invest in equity assets. You can follow this guide on investing a lump sum amount into equity by investing first in a debt mutual fund and running an STP as per this post: SIP vs. lump sum: how to invest into equity?.
Excess equity allocation and low debt
The post-March 2020 or similar bull market could have led to cases where the equity allocation has ballooned, leading to an excessive amount of assets in equity. This situation will require an immediate risk reduction by selling equity and getting into suitable debt assets from this list: How to choose debt instruments for retirement?.
You should extend the PPF account with fresh investments per the SIP amount allotted to debt assets.
Case studies
We consider a few case studies with variations of time left until retirement, income stability, and goals due in the next five years. In each situation below the investor should carefully understand their risk profile and income potential for the next ten to fifteen years. There would be a complex interplay between risk taking willingness (“want” to take risk”), risk taking ability (“can” take risk) and risk taking requirement (“need” to take risk) that needs to be considered. A primer on this concept of risk profiling along with a profiling tool to determine your risk profile is discussed here: Do not invest in mutual funds before doing this.
Already retired
Retired investors should reconsider the lure of guaranteed returns of PPF vs the need to balance inflation in the portfolio. We recommend that the retired investor take this ample cash infusion opportunity and create a three-bucket portfolio. You need to make three buckets:
Bucket 1: Cash assets for immediate expenses: The purpose of this bucket will be to hold inflation-adjusted living expenses for the next five years
Bucket 2: Income assets for stability and future income: The purpose of this bucket is to hold assets that generate income
Bucket 3: Growth assets to grow the corpus to beat inflation: This bucket will have everything that is not there in buckets 1, and 2 above and will be primarily equity in the form of index mutual funds
The PPF maturity amount should be considered part of the Cash Bucket 1 and then rebalanced into the other buckets as needed. Any new allocation into Bucket 2 should be left in PPF.
are there major loans: as a result to the above, the PPF amount can be used to pay off a home loan or be used for children’s education
The right way forward will be to use the “Earnings year left” section in the goal-based investing template to ensure that you are realistically modelling the number of years you will have income.
Professional in mid-50s with an undefined retirement date
We consider the hypothetical case of a doctor in their mid-50s who does not have a defined retirement date due to the nature of their profession. However, just because they can, it may not mean that they will be working at their current pace for the next 10-15 years. If major expenses are not planned in the next five years, then the investor should invest a part of their PPF proceeds into equity only if the asset allocation allows it.
NRI investor
NRIs cannot extend the PPF account post-maturity, so they need to reinvest in other investments.
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This post titled Should you renew your PPF account or invest in mutual funds? first appeared on 16 Mar 2022 at https://arthgyaan.com
